Fears in the City that Sir John Vickers will recommend a radical overhaul of the banking sector jolted shares in the major players today amid concern that it would become more expensive for banks to fund their operations.

The influence of the Liberal Democrat leader Nick Clegg and business secretary, Vince Cable, could be seen in the decision to delay the conclusion of the so-called Project Merlin talks, which had been pencilled in for . Merlin, led by former Barclays chief executive John Varley, is trying to call a truce between the City and government.

But lenders are thought to be resisting demands that they reveal the pay packages of their five highest-paid staff – as HSBC is required to do under Hong Kong's regulations. The government also wants to be convinced that any commitments to lend to businesses are verifiable and large enough to sustain an economic recovery. The banks are thought to be prepared to lend between £160bn and £180bn. It is not clear if ministers regard this as sufficient.

Shares in the bailed-out Lloyds Bank and Royal Bank of Scotland, as well as Barclays, defied the rise in the FTSE 100 as the banking sector was the largest faller in the index of blue-chip stocks. Lloyds was the biggest faller, losing 3% to 65.5p, after the broker UBS downgraded its forecasts while remaining bullish on the shares.

UBS expects the new chief executive, António Horta-Osório, to create a clear division between Lloyds' existing operations and those in run-off (reducing the portfolio as loans are paid off) or earmarked for sale, after he takes over on 1 March.

The speech by Vickers, only his second public pronouncement on his views since being asked by the coalition to look at competition in the banking sector, was cited as the reason for the fall.

Vickers ruled out some of the most drastic remedies for banks that might avoid another taxpayer bailout – such as creating "narrow banks" that can only take deposits – although he left on the table a range of other options. The one that appears to be of most interest to the City would be a recommendation that banks are forced to "ring-fence" certain of their operations in a process known as subsidiarisation.

Gareth Hunt, analyst at Investec Securities, noted that Vickers might not have been as dramatic as feared but his remarks "left the door open to subsidiarisation".

Analysts at Société Générale believe profits of the investment banking arm Barclays Capital could be cut by 30% if the commission concluded that it could no longer rely on funding from the parent bank, as would happen if it was ring-fenced. Bankers warn this could lead to cuts in lending and higher lending costs to businesses and households.

Submissions to the Vickers commission are expected to be published shortly before an interim report in April. The commission's final recommendations will be put to the chancellor, George Osborne, who is chairing a cabinet sub-committee on banks, in September.

Lord Oakeshott, a Liberal Democrat Treasury spokesman, said Vickers were "bound to come up with radical reform for what our coalition agreement calls Britain's broken banking system. I'm sure the government will do whatever Vickers judges necessary to make our banks safe again."

Barclays bonus bonds

Barclays is considering paying some of its senior staff in bonds, rather than shares, as it responds to regulatory demands to reform bonuses. The bank is deciding whether to use contingent convertible bonds, or "CoCos" – a new type of bonds that converts into shares should the bank run into difficulty. RBS has had to pay bonuses in bonds, rather than shares, since it was bailed out by the taxpayer. The state-backed bank uses subordinated debt – a risky form of debt – partly because its share price is so low that it would have had to issue huge numbers of shares to bankers.